http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/180337/index.do
Kvas v. The Queen (September 15, 2016 – 2016 TCC 199, Bocock J.).
Précis: This case involved the appeals of the Kvas brothers from subsection 160(1) assessments alleging that each of them had received transfers of property on or about December 31, 2008 from Commercial Interior Alterations Inc. (“CIA”), a corporation of which they had been the shareholders. The difficulty was that CIA had been dissolved in January of 2008, i.e., roughly 11 months before the alleged transfers and 6 years before the issuance of the assessments. The Tax Court was asked to determine whether subsection 160(1) assessments could be raised in respect of a transfer from a non-existent entity. Not surprisingly, the Court concluded that such assessments were invalid and allowed the appeals of the Kvas brothers. The parties were given 30 days to make submissions as to costs.
Decision: The essential facts of this case were not complex:
[1] The appeals concern two brothers, Paul and Peter Kvas (the “Kvas brothers”). They incorporated a company, Commercial Interior Alterations Inc. (“CIA”) in 2002. It was dissolved by the Province of Ontario for failure to file corporate tax returns in January of 2008. The Minister raised a section 160 assessment against the Kvas brothers in 2014. The Minister specifically allege in the notices of assessment that “on or about” December 31, 2008 a “transfer of Dividends” was made by CIA to the Kvas brothers. The Minister relied upon the following: (i) CIA no longer existed; (ii) the balance sheet completed by an accountant after the dissolution afforded a deductive dissipation of assets; and, (iii) a T-5 was filed in 2009 by the same accountant describing dividends paid in 2008 to the Kvas brothers relating to the assets which roughly corresponded to the assumed dissipated assets. No relevant facts are materially in dispute; however, whether the facts hold CIA to be a “transferor” of the “transfer of dividends” or whether a transfer within the meaning of section 160 has occurred are the issues very much in dispute in this appeal.
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[15] The Respondent’s reply specifically references the November 4, 2009 filed CIA 2008 corporate tax return “reporting dividends paid to” each Kvas brother who:
(i) withdrew CIA funds to pay personal tax in the 2008 taxation year totalling $44,590.47;
(ii) withdrew CIA funds in the 2008 taxation year of $17,000.00 for personal use;
(iii) owed CIA $22,308.00 in the 2008 taxation year which was never repaid; and
(iv) received a transfer of corporate assets of CIA property and equipment valued at not less than $23,882.00.
[16] The reply concludes with the statement that each Kvas brother received a total shareholder benefit from CIA of at least $53,880.24 (which it is admitted should have read $53,573.00 for each brother).
Simply put the Court concluded that there could be no transfer on or about December 31, 2008 by a corporation that was no longer in existence:
[43] These ironies are not lost on the Court. As stated by Respondent’s counsel, the “pink elephant in the room” in October, 2009 were the retroactive T-5s and revised financial statements as referenced by Respondent’s counsel. However, the earlier “pink elephants in the room” are the involuntary dissolution of CIA for failure to file its corporate tax returns, initiated by the CRA and followed by demands for payments, tax returns and other “catch up” compliance steps, culminating 18 months later in a refusal by CRA to consent to its revival, its directed conversion of CIA to a partnership and a section 160 assessment in respect of the “former” corporate assets. Curiously as well, the section 160 assessment relates to unremitted source deductions which appear not to have been pursued in the more usual and direct manner.
[44] CIA’s property was not “transferred” by CIA, but ascribed by CRA through a deemed dividend under subsection 84(2) which itself initially formed the basis for the section 160 assessment by virtue of a deductive dissipation of assets. However, the fact remains that a retroactive T-5 and post-facto financial statements, necessitated by CRA’s “managed enforcement” cannot create a transfer where none exists. That transfer is an essential element to a section 160 assessment. It must be undertaken or effected at the relevant time by the tax debtor/transferor, not constructed through multiple third party payments, deductive dissipation of assets over many months or the “deeming” of dividends or the “conjecture” of a benefit. Moreover, the assessment, when raised, must accurately depict these “quantitative” and “timing” components.
[45] For these reasons, the bridge too far was not reached. No transfer of property under section 160 occurred. Since such a transfer must occur, the section was not engaged. Therefore, the appeal is allowed.
The parties were given 30 days to make submissions as to costs.